What does the MSCI upgrade actually mean?

Ed Attwood ponders the consequences of reclassifying stock markets in the UAE and Qatar

By Ed Attwood

Fri 14 Jun 2013 11:37 AM

We’ve been waiting for the MSCI upgrade for so long that its arrival — in the early hours of last Wednesday morning — came as something of a shock. For six years, hopes have been raised, then dashed, with depressing regularity. The UAE and Qatar both sought entry to the emerging-markets tier back in 2008, but have been turned down five times since the first review took place in 2009.

In fact, the length of time taken to gain the upgrade has somehow ensured that last week’s decision may have garnered a greater aura of importance than perhaps it actually deserves. So what does it actually mean?

By including the UAE and Qatar in the emerging market index, both countries have won entry to what is by far the most widely adopted benchmark for those fund managers and investors who have an interest in emerging markets. That amounts to a fair few; the index is heavily used in Asia and the US, and as many as two thirds of fund managers in Europe use it as their index provider of choice.

According to Global Investment House, roughly $1.5 trillion of funds are benchmarked against the MSCI emerging markets index, and a sizeable amount of this will find its way onto the Emirati and Qatari bourses. With Qatar’s weighting in the index at 0.45 percent, and the UAE’s at 0.4 percent, the initial sums are not life-changing, although they will add institutional investor stability to equity markets that in the past have suffered from a lack of liquidity.

JP Morgan predicts that the weightings mean that net inflows arising from the upgrade will amount to $570m for Qatar and $442m for the UAE. That may not be small change, but of itself, the sums are not life-changing. And in many respects, there is no time for either country to rest on its laurels. While foreign ownership levels have been increased, there is still much work to be done on boosting those limits still further, particularly in Qatar.

While limits for some UAE and Qatari companies are as high as 49 percent, the caps for the two biggest listed Qatari companies, Industries Qatar and Qatar National Bank, sit at 12.25 percent and 12.49 percent, respectively. Even those low thresholds are higher than they were previously. Proof that higher foreign ownership limits can help boost interest in a stock comes in the form of the 29 percent rise in Industries Qatar’s share price since the firm raised its cap from 7.5 percent last September.

The elephant in the room is, of course, Saudi Arabia. The size of the Tadawul dwarfs the bourses in the UAE and Qatar, yet is not listed on any MSCI index due to its stringent rules against foreign investment, except via equity swaps and exchange-traded funds. It’s safe to say that the top brass at the Capital Markets Authority (CMA) in Riyadh will be watching further developments very closely.

Having patched up its differences with MSCI last year after a row in 2009, there have been hints dropped on a regular basis that the CMA could allow foreign ownership limits, although it’s impossible to say when this might be. Any decision could see the Saudi bourse catapulted straight into MSCI’s emerging markets index; most institutional investors would see the likes of SABIC as an interesting addition to their portfolios.

The upgrade for Qatar and the UAE is undoubtedly good news, but the real work starts now.